Know your product. And know it's not a product.
Continuing thoughts from Lesson #2...
Another reason pitting one home against another purely based on the features and/or characteristics of the physical homes, their geography, and the proximity to demand drivers, is that the features and characteristics don’t always equate to perceived value from the customer's standpoint. Is the home that has fifty reviews averaging 4.8 stars over the course of several years more or less valuable than the one next door with the same floor plan that has two 5-star reviews from two months ago? Revenue managers should be weighing this and other variables when considering yield tactics and yes, even overall pricing strategy. The hard part is that the answers are rarely obvious and will almost always vary based on individual homes and situations.
Value insofar as how we view it strategically in pricing in the STR/VR space, is something that has been largely glossed over as a significant pricing variable. It’s abstract, largely subjective, and consequently, difficult to quantify – but it’s exactly what is being sold, whether we figure out how to accurately price it or not. Complicating things further is how difficult it is to stay on top of all the possible booking channels to ensure that each property is merchandised appropriately for the looker on that channel.
The hospitality sector has historically used dynamic pricing strategies, but particularly in the STR/VR realm, pricing strategies can take on some pretty interesting hybrid structures. According to Investopedia, the definition of value-based pricing or perceived value pricing is, “…a strategy of setting prices primarily based on a consumer’s perceived value of a product or service. Value-based pricing is customer-focused, meaning companies base their pricing on how much the customer believes a product is worth… Companies that offer unique or highly valuable features or services are better positioned to take advantage of the value-based pricing model than companies that chiefly sell commoditized items.”
Most PMs in leisure areas aren’t selling commoditized products (in a traditional sense anyway). That said, it’s almost like we have so much uniqueness in our space that the variety in aggregate actually becomes a commoditized product itself (don’t anyone run with that logic; it’s just wacky Sarah-thinking). Anyway, perceived value is always difficult to determine or measure (enter marketing), but even more difficult when the variables are often subjective and change from property to property. And since perceived value doesn't necessarily equate to monetary value, it's even more wonky. On top of that, there’s a lot of supply out there giving consumers many choices, particularly in slower demand times when availability is that much greater. Value-based pricing is “Nice work if you can get it,” as the margins can be high and customer loyalty can be reinforced, but most of the time, you’ll have to also balance that with a dynamic and/or competitive pricing strategy. As an industry, we start to shift to a more competitive strategy as booking windows shrink and demand stagnates.
But let's face it - pricing is always value-based, regardless of the moniker we use to define it; tactics shift based on what is being valued over who is making the valuation (because in the end, it's always the consumer that’s making the judgment to purchase). During high-demand periods when people expect to pay more, “value” may equate to the availability of a unique home with amazing features or a perfect floorplan that will accommodate their party perfectly; but in slower demand stretches, “bang for your buck” becomes more important (though it's always important), even while available options to the consumer increase. Each of our competitors have four walls and a roof they’ll rent to you. But guests, especially now, are looking for more than those four walls; they want value (whatever that means to them at any given moment). Sure, cleanliness and great service are valuable, but everyone expects that. As I mentioned in a previous post, revenue strategy is not static – but neither is perceived value.
We all know that after a guest decides to book and then hands over their credit card number, the transaction isn’t complete; in fact, in our industry, it’s just begun. One could convincingly argue that at this point, the stakes get even higher. It’s no longer just wooing them with pretty pictures and flowery descriptions; now you have to produce. The concept of quality is largely product-driven; perceived value includes quality assessment, but also includes more abstract things like convenience, safety, service, review scores (expectations), et al. And those things are highly personal to each guest (making pricing even more difficult).
So what to do? The good news for those of us whose job is to help manage expectations for an emotionally charged product via pricing, is that we're creative creatures by nature and it’s fun to think about ways to positively affect perceived value without actually increasing its objective value. It’s always helpful when owners replace worn furnishings or renovate to match the current century, but we can only control what we can control. It comes down to managing people's perceptions… Easy, right? Well, I don’t know about “easy,” but – particularly with some marketing acumen and elbow grease – I believe it can be more accessible and possible.
There are vendor companies out there in the STR/VR space whose sole objective is to help PMs build and price value adds – Xplorie and Mount come to mind immediately (I have personal experience working with Matthew Loney and Xplorie for many years at Natural Retreats and am happy to have a discussion with anyone about that experience should you be interested). As with everything in Revenue Management (and frankly, life in general), I would never tell you that you should or shouldn’t use a specific product or service – that’s not the point. Whether you use a third-party vendor or not is not as important as whether you ultimately provide the value your guests are seeking. Guests expect exceptional value; and with vendors like Xplorie, et al., it is becoming much easier to provide it with value adds, especially when you can’t control the attributes of the property itself. If I am not making an effort to add and then communicate exceptional value to my guests, the probability is high that my competition is.
Ultimately, it’s important to recognize that revenue management is comprehensive. While it’s traditionally been about optimizing top line performance (though someday I’ll post about how I think incorporating a bottom-line mindset is crucial), it goes far beyond pricing the number of bedrooms and bathrooms. It's also ensuring that the objective and subjective potential of the property is analyzed, and all opportunities to leverage value and perceived value are considered and employed. An entire additional post can be written about the importance of then taking those things to market, but I’ll leave it to another day…
-Sarah
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